Evaluate the effectiveness of tax on sugary

foods in resolving overconsumption

Analysis:

Sugary foods create a negative externality of consumption as it causes there to be over

consumption. This means that on a market failure diagram the marginal private benefit will
be greater than the marginal social benefit as people may consume sugary foods for a
feeling of comfort and so individuals only think about themselves and their private benefits
when deciding to consume the good, ignoring any harms and costs to third parties such as
putting pressure on the NHS because of the increasing level of obesity caused by the over
consumption. The msc curve will also be less than the mpc curve as negative externalities are
taken into account and people are consuming more than what is socially desirable, meaning
that the market is failing. This therefore shows that firms are allocating too many resources
to the production of sugary foods which do not benefit society.

If the government has perfect information they will impose a tax the exact size of the
negative externality which will cause the firms costs of production to increase so it will be less
profitable for them to supply their goods. The marginal private costs will shift to the left to
mpc + tax and firms will now increase their prices of sugary foods to pass on this cost to
consumers as they cannot absorb the costs. This leads to a decrease in the demand for
sugary foods and so Qm shifts to Qstar and consumption is now at a socially optimum. A tax
is therefore effective as this internalises the externality which solves market failure. Using tax
is also a market-based solution as they haven't exactly banned the market but have removed
the externality.

Furthermore, when a government places a tax, tax revenue is generated especially as sugary
foods can be seen as an inelastic good. This means that when prices increase, people will still
continue to consume the goods and firms will continue to earn profit so the government can
collect a lot of corporation tax from firms. The government can then use the tax revenue they
collect from the sugar tax to hypothecate and provide subsidies to healthier firms providing
low-fat and cheaper alternatives instead of harmful food. This leads to the supply shifting to
the right for these healthier substitute firms and so prices will decrease, incentivising
consumers to buy goods from these firms and leading to a decrease in consumption.

Evaluation:

However, the government may not always have perfect information and find it difficult to
know how much of a tax to impose on sugary goods. They cannot always quantify everything
and measure the size of the externalities which could mean that the tax set could be too big
or too small. If the tax is set too small, firms cost of production will not increase by a lot and
prices only rise by a little amount, so sugary foods will still be affordable. The new quantity
demanded will still be above Qstar so there is still over consumption. This also means there is
still allocative inefficiency as too many resources are allocated to the production of sugary
goods and there is still over consumption which only partially resolves the problem.
If the tax is set too high, firms cost of production will increase by too much and prices will
rise by a huge amount as firms pass these costs onto consumers, so sugary foods will no
longer be affordable. The new quantity demanded will now instead be below Qstar, which
eradicates over consumption but there is now underconsumption which may be worse as low
income households as cannot afford to buy these goods at all.

Moreover, if the good is an inelastic good this means that a tax is less effective in resolving
over consumption as people are addicted to the good and there are not any reliable or close
substitutes which means that demand will fall less than proportional: people carry on
consuming these sugary foods. Consequently, demand will still be above Q star, so they
cannot tackle over consumption completely.

Judgement:

In judgement, this depends upon the impact of tax on income inequality and the effect it has
on households as a tax imposed could have a regressive effect. This means that it takes a
larger proportion of income of lower income households which increases income inequality.
This means that it may be more affordable for high income earners but low income
households cannot afford to buy it anymore as they will retain less of their disposable
income. Furthermore, firms don't pay the tax themselves and pass on the costs to consumers
by increasing prices which further worsens income inequality. Overall a tax as may not be
that effective on sugary foods in resolving over consumption as it may lead to consumers
also being rationed out of the market.